ITAD BIR Ruling No. 137-12

March 27, 2012 ITAD BIR RULING NO. 137-12 Articles 5 & 7, Philippines-Germany tax treaty Isla Lipana & Co. 29th Floor, Philamlife Tower 8767 Paseo de Roxas 1226 Makati City Attention: Zayber B. Protacio Principal, Tax Gentlemen : This refers to your Tax Treaty Relief Application ("TTRA") filed on July 26, 2010, on behalf of BOMBARDIER TRANSPORTATION GMBH ("BTG"), requesting confirmation that income from services of BTG under its Service Agreement ("the Agreement") with BOMBARDIER TRANSPORTATION PHILIPPINES, INC. ("BTP") is exempt from Philippine income tax, pursuant to the Agreement between the Republic of the Philippines and the Federal Republic of Germany for the Avoidance of Double Taxation with Respect to Taxes on Income and Capital ("Philippines-Germany tax treaty"). It is represented that BTG, with office address at Schneberger Ufer 1, 10785 Berlin, is a corporation duly organized and existing under the laws of Germany and is a resident of Germany within the meaning of the Philippines-Germany tax treaty as certified by the Finanzamt fr Krperschaften III dated December 14, 2009; that it is not registered either as a corporation or as a partnership in the Philippines per the Certification of Non-registration of Company issued by the Philippine Securities and Exchange Commission on June 16, 2010; and that, on the other hand, BTP is a company incorporated and existing under the laws of the Philippines with office address at Units 1403-1404 A and B Asiatown I.T. Park Barangay Apas, 6000 Cebu City, Philippines. It is also represented that a SERVICE AGREEMENT ("the Agreement") dated December 17, 2009 was entered into between BTG and BTP, the former as the Service Provider and the latter as Service Recipient for the provision of Start-Up Services to BTP in 2009 and 2010; that the Start-Up Services are to be provided outside the Philippines mainly and that, in any case, the stay of BTG personnel in the Philippines in providing Start-Up Services will not exceed 6 months in any twelve-month period; that as regards the consideration, the BTG will pass on its costs arising in 2009 and 2010 in connection with Start-up Services without mark-up but plus indirect taxes to BTP, as provided in Annex 1 of the Agreement; that, per the Sworn Certification of the authorized representative of BTP dated November 16, 2011, BTG has provided on-site services at the premises of BTP services more specifically described as follows: CDESIA Planning and product management Communication and change management in migrating countries, including transition management Process analysis, development of operating model and activity split Training of BTP's new employees Workshadowing i.e. , on the job training, with help of tools and templates Support recruitment of BTP's new employees Establishment of desktop procedures. It is further certified that the total period of any on-site work at BTP premises by BTG personnel in providing the foregoing services did not exceed six (6) months within any twelve-month period and lasted only for 103 days as illustrated below: Employee Date of Arrival in the Date of Departure Total No. of Days Philippines from the Philippines Stayed in the Philippines Kennerth Lundgren 2 March 2009 5 March 2009 4 16 April 2009 28 April 2009 13 Stuart Parr 26 April 2009 1 May 2009 2 1 4 August 2009 8 August 2009 4 24 November 2009 2 December 2009 9 4 January 2010 15 January 2010 12 9 March 2010 18 March 2010 10 18 May 2010 29 May 2010 12 16 August 2010 20 August 2010 5 4 November 2010 18 November 2010 15 Heinrich Kapellke 15 August 2009 5 September 2009 17 2 Total No. of Days of Stay in the Philippines 103 === It is finally represented that the transaction subject of the above TTRA is not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, judicial or administrative protest, collection proceedings or a judicial appeal of the taxpayer/s involved. SHTEaA In reply, please be informed that income derived in the Philippines by a nonresident foreign corporation is generally governed by Section 28 (B) (1) of the National Internal Revenue Code (NIRC) of 1997, as amended. It provides, viz.: "SEC. 28. Rates of Income Tax on Foreign Corporations. xxx xxx xxx (B) Tax on Nonresident Foreign Corporation. (1) In General. Except as otherwise provided in this Code, a foreign corporation not engaged in trade or business in the Philippines shall pay a tax equal to thirty-five percent (35%) of the gross income received during each taxable year from all sources within the Philippines, such as . . . profits and income , . . .: Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)." (Underscoring supplied) xxx xxx xxx However, under Section 32 (B) (5) of the same Code, the said income may not be subject to Philippine income tax. It provides, viz.: "SEC. 32. Gross Income. xxx xxx xxx (B) Exclusions from Gross Income. The following items shall not be included in gross income and shall be exempt from taxation under this Title: 3 xxx xxx xxx (5) Income Exempt under Treaty. Income of any kind, to the extent required by any treaty obligation binding upon the Government of the Philippines." Based on the above, you invoked Article 7 (1) and Article 5 of the Philippines-Germany tax treaty which respectively provide, viz.: "Article 7 BUSINESS PROFITS 1. The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to that permanent establishment. . . ." "Article 5 PERMANENT ESTABLISHMENT 1. For the purposes of this Agreement, the term 'permanent establishment' means a fixed place of business in which the business of an enterprise is wholly or partly carried on. 2. The term 'permanent establishment' shall include especially: aHECST a) a place of management; b) a branch; c) an office; d) a factory; e) a workshop; f) a warehouse, in relation to a person providing storage facilities for others; g) a mine, quarry or any other place of extraction of natural resources; h) a building site or construction or assembly project or supervisory activities in connection therewith, where such site, project or activity continues for a period of more than six months. xxx xxx xxx" Based on the foregoing, the service fees paid by BTP to BTG shall not be subject to Philippine income tax if BTG, being a resident of Germany, does not have a fixed place of business in the Philippines; or even if it has such a fixed place, but said fees are not attributable to such fixed place. However, should employees of BTG be required to render services in the Philippines, like for example, an assembly or installation project which exists for more than six months, such shall be deemed to constitute as permanent establishment of BTG in the Philippines. Accordingly, such service fees shall be subject to Philippine income tax. Relative thereto, please be informed that under Section III (2) of Revenue Memorandum Order No. 1-00 (Procedures for Processing Tax Treaty Relief Application) ("RMO 1-2000"), any availment of tax treaty relief (exemption from income tax or reduction of tax) shall be preceded by an application filed at the International Tax Affairs Division ("ITAD") of this Bureau at least 15 days before the intended transaction or payment of income, thus: ESDcIA "III. Policies: In order to achieve the above-mentioned objectives, the following policies shall be observed: xxx xxx xxx 2. Any availment of the tax treaty relief shall be preceded by an application by filing BIR Form No. 0901 (Application for Relief from Double Taxation) with ITAD at least 15 days before the transaction i.e. , payment of dividends, royalties, etc., accompanied by supporting documents justifying the relief . . ." (Underscoring ours) This condition was emphasized by the Court of Tax Appeals in Mirant (Philippines) Operations Corporation vs. Commissioner of Internal Revenue (C.T.A. Case No. 6382 dated June 7, 2005) where it ruled: " However, it must be remembered that a foreign corporation wishing to avail of the benefits of the tax treaty should invoke the provisions of the tax treaty and prove that indeed the provisions of the tax treaty applies to it, before the benefits may be extended to such corporation. In other words, a resident or non-resident foreign corporation shall be taxed according to the provisions of the National Internal Revenue Code, unless it is shown that the treaty provisions apply to the said corporation, and that, in cases the same are applicable, the option to avail of the tax benefits under the tax treaty has been successfully invoked. Under Revenue Memorandum Order 01-2000 of the Bureau of Internal Revenue, it is provided that the availment of a tax treaty provision must be preceded by an application for a tax treaty relief with its International Tax Affairs Division (ITAD). This is to prevent any erroneous interpretation and/or application of the treaty provisions with which the Philippines is a signatory to. The implementation of the said Revenue Memorandum Order is in harmony with the objectives of the contracting state to ensure that the granting of the benefits under the tax treaties are enjoyed by the persons or corporations duly entitled to the same. aESIDH The Court notes that nowhere in the records of the case was it shown that petitioner indeed took the liberty of properly observing the provisions of the said order. Petitioner quotes various BIR, as well as ITAD, Rulings issued to several foreign corporations seeking for a tax relief from the office of the respondent. However, not any one of these rulings pertains to the petitioner. It must be stressed that BIR rulings are issued based on the facts and circumstances surrounding particular issue/issues in question and are resolved on a case-to-case basis. It would be thus erroneous to invoke the ruling of the respondent in specific cases, which have no bearing to the case of petitioner." (Underscoring ours) This decision was also upheld by the Supreme Court in a Resolution (G.R. No. 168531) dated February 18, 2008. Furthermore, the necessary requirement laid down in RMO 1-2000 is reiterated in subsequent rulings of the Court of Tax Appeals: Deutsche Bank AG Manila Branch vs. Commissioner of Internal Revenue (C.T.A. Case No. EB 456 dated May 29, 2009), CBK Power Company Ltd. vs. Commissioner of Internal Revenue (C.T.A. Case Nos. 6699, 6844 and 7166 dated March 29, 2010) and Manila North Tollways Corporation vs. Commissioner of Internal Revenue (C.T.A. Case No. 7864 dated April 12, 2011). In view of the foregoing, this Office hereby DENIES relief on the service fees paid by BTP to BTG before the subject TTRA was filed on July 26, 2010 since the TTRA was filed beyond the 15-day period prescribed by the RMO. Accordingly, the service fees paid by BTP pursuant to the Agreement before July 26, 2010 shall be subject to income tax at 30 percent as provided for under Section 28 (B) (1) of the Tax Code of 1997 cited above. However, considering the representation that BTG does not have a fixed place of business in the Philippines, and that BTG shall perform services for a period not to exceed six (6) months pursuant to the Agreement, then BTG shall not be deemed to have a permanent establishment in the Philippines to which the payment of fees may be attributed. Accordingly, this Office hereby GRANTS relief on the service fees paid by BTP to BTG after 15 days from the filing of the TTRA on July 26, 2010, and the said service fees shall not be subject to Philippine income tax pursuant to Article 7, in relation to Article 5, of the Philippines-Germany tax treaty. However, Section 108 of the Tax Code of 1997, as amended, provides that the above fees for such services rendered in the Philippines are subject to value-added tax (VAT): AaHDSI "SEC. 108. Value-added Tax on Sale of Services and Use or Lease of Properties. (A) Rate and Base of Tax. There shall be levied, assessed and collected, a value-added tax equivalent to ten percent (10%) of gross receipts derived from the sale or exchange of services, including the use or lease of properties: Provided, That the President, upon the recommendation of the Secretary of Finance, shall, effective January 1, 2006, raise the rate of value-added tax to twelve percent (12%), 4 after any of the following conditions has been satisfied: (i) Value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous year exceeds two and four-fifth percent (2 4/5%); or (ii) National government deficit as a percentage of GDP of the previous year exceeds one and one-half percent (1 1/2%). The phrase 'sale or exchange of services' means the performance of all kinds of services in the Philippines for others for a fee, . . ." (Underscoring supplied) With regard to the procedures for the withholding and the payment of the VAT, BTP, being the resident withholding agent and payor in control of the payment shall be responsible for the withholding of the final VAT on such fees before making any payment to BTG. In remitting the VAT withheld, BTP shall use BIR Form No. 1600 (Monthly Remittance Return of Value-Added Tax & Other Percentage Taxes Withheld). The duly filed BIR Form No. 1600 and the proof of payment thereof shall serve as documentary substantiation for the claim of input tax to be applied against the output tax that may be due from BTP if it is a VAT-registered taxpayer. In case BTP is non-VAT-registered, the passed-on VAT withheld shall form part of the cost of the service purchased and may treat such VAT as an "expense" or as an "asset", whichever is applicable. In addition, BTP is required to issue a Certificate of Final Tax Withheld at Source (BIR Form No. 2306) in quadruplicate, the first three copies for BTG and the fourth copy for BTP as its file copy. (Sections 4 & 6, Revenue Regulations (RR) No. 4-2002; Section 3 of RR 8-2002; Section 7 of RR 14-2002) This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the actual facts are different, then this ruling shall be without force and effect insofar as the herein parties are concerned. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. April 26-28, 2009 stay of both K. Lundgren and S. Parr counted only as one (1). 2. August 15-20, 2010 stay of both S. Parr and H. Kapellke counted only as one (1). 3. TITLE II TAX ON INCOME. 4. The VAT rate was increased to 12% on February 1, 2006, in accordance with the Memorandum of the Executive Secretary to the Secretary of Finance dated January 31, 2006, as circularized by Revenue Memorandum Circular No. 7-2006 (Publishing the Full Text of the Memorandum from Executive Secretary Eduardo R. Ermita dated January 31, 2006 Approving the Recommendation of the Secretary of Finance to Increase the Value-Added Tax Rate from Ten Percent to Twelve Percent) dated January 31, 2006.